Easiest Investment Funds to Manage After Raising Capital (Ranked)

Welcome back to the show. Today we are ranking the hardest to easiest funds to manage post-raise. So after they've raised the fund, how hard or easy it is to manage and actually drive above average performance for these funds. Our categories are private credit, private equity, fund of funds, real estate, venture capital, and hedge funds. Today I have with my guest, Mr. Lincoln Archibald, co-founder of Fund Launch Partners, a $30 million GP stakes fund. Welcome on, Lincoln.

Thank you.

Kick us off. What is the hardest fund to manage post-raise and drive good performance for from that list? What do you have first?

Okay, well, managing and driving performance are 2 different things.

Okay, we're going driving performance.

Driving performance. I would say the hardest is a venture fund.

Ah, interesting.

So venture is a game where, I mean, 80% of the returns just come from vintage, right? Like if you're investing at the right time, You know, another half of it is your size of like what type, you know, smaller funds typically do better. And I mean, look, you're building a big portfolio. I mean, yes, there's, there's few outlier VCs out there that win, but a lot of them are very mediocre. Right. And it's very difficult to— you have a long realization window.

Yeah.

Right.

You invest today, right?

You don't, you know, you make an investment today, you don't know for 8 years if you're right.

Yep.

And so, or 10, and lately, I think the average exit now is—

It's a lot longer.

It's 12. Is it 12 now?

COVID extended things, and there hasn't been a, you know, the IPO market's been way less. So a lot of these funds are extending.

Yeah, venture's a tough business right now.

Yeah.

You know, to drive, and look, it changes, but I would put that as the hardest right now.

Venture was close to my top, but not my top. I put hedge funds as my top for obvious reasons. It's day-to-day market fluctuations. You could have a model that works really well and then doesn't. You know, everything works great for the last 3 years and then some shift happens in the world like a Terraform or like a yen carry trade or something and your whole fund is blown up. And it's also a zero-sum game. You're competing against every hedge fund on earth at the same time, all at once.

Yeah.

I would just say like to drive above average performance and then also to beat index funds. You're trying to beat the S&P 500, which is a pretty darn good index fund. Trying to beat the Nasdaq, the Dow. So your competition, your risk-free rate, I think is, you know, a lot harder in hedge funds and you're compared against more scrutinized things.

Okay. So we had very different takes on this.

Very different. Yeah.

So my, my hedge, I put hedge funds as 4.

Oh, dang.

And here's the reason is because I think—

see, he doesn't run a hedge fund. You can tell. He can tell. I run a hedge fund. I run a hedge fund. I put it number 1. You can tell he doesn't run a hedge fund. Why'd you put it number 4 though?

Well, I think it's a big market and there's room for creativity. Okay. Like there's room to be like, you can either drive informational alpha, behavioral alpha, or analytical alpha in the hedge fund space. Like, I mean, don't get me wrong, very difficult to do, very difficult to do. But I'm saying, is there an opportunity set to drive above average performance? I would say absolutely right. There's parts of the market that are very inefficient. And so that's where there's opportunity to drive outperformance. So as my number 2 and 3, I thought about it. My number 2 is private credit. The reason being is that, you know, your returns are very like— it's hard to beat everyone else in private credit because there's not a lot of levers you can pull.

Right.

I mean, you're dependent on what rates are today. And, you know, everyone's close around the same shop. You know, it's very competitive lending. And like, if you outperform the next best fund, you're, you're talking about half a percent or a percent, right? And so it's hard to really stand out and drive outperformance in private credit. And the same reason on fund of funds was fun. So fund of funds was my number 3 for a very similar reason. There's not a lot of room to drive alpha.

Against competing funds. Yeah, that's where you're at. Interesting. So I put private credit actually towards my easiest, my second easiest, because I think private credit, whatever it is on the list, I think it's 5. Well, because you have collateral and I was going after—

You don't drive out performance with collateral.

Well, I'm saying performance against the market players in general, like private credit funds to manage and run a private credit fund. You do a loan, if it all is going well, you have collateral you collect on. And it's hard to lose money in private credit. You're not losing money very often in private credit unless there's a big just unwinding of something. So, I sat there and said, well, and maybe now compared to other private credit funds, I think maybe you're right. It is hard to drive. But like comparative to a hedge fund or real estate fund or other funds or just the market in general, like private credit is actually, towards me, was one of my easier funds to manage.

Well, yeah. No, again, 2 different things, managing and driving outperformance. To manage, yeah, absolutely. Private credit is, you know, very easy to manage.

Yeah, yeah.

But to drive outperformance is, compared to the peers—

The peers, a little bit harder. Okay, I see what you're saying.

Is very different.

Maybe we ranked them a little bit there. Let me go to my second one here. I put venture capital as number 2.

Okay.

So, in line with what you said. A lot of people want to be in VC, but it's also very hard to drive outperformance in VC.

Yeah.

For all the things you mentioned. Number 3 was fund of funds. We both tied on that one. Number 3 was fund of funds. And then I put number 4 was private equity. Now we're starting to get towards, I guess, the easier half here. But private equity depends on the flavour of private equity, large private equity or small private equity. But managing and driving outperformance, I believe in private equity comes down to the operators, which is so awesome. In a fund of funds, you're depending on other operators. In private credit or venture, sometimes you're depending on other people. I feel like in private equity, it's on you and your team because you're coming, you're buying a business and you're seeing how effective can I manage this business? So, when I'm sitting here like, I don't know, I'm betting on me, right?

Yeah.

If I'm running a private equity firm, like I'm betting on me and my executive team to come in and really drive some huge performance in this. Maybe we're buying a certain set of businesses that are all in a, I don't know, in car washes or in, I don't know, dental practices that we're going to roll together. For me, I was like, okay, I think, I think I could find some alpha there. I think I could drive performance just by working hard and have a very good executive team. That's why I put that as number— I guess it's number 4 on mine. And then private credit was number 5 right after that, just because of the collateralization of private credit. Like, you can just— if you just collateral— if you just wait and pick the correct loans on private credit, yeah, I'll lend you $1 million and I have $1.7 million as collateral. It's hard to lose if you can secure that.

It's hard to lose. But how do you beat the next guy? Right. And that's where—

You're more selective. Yeah, you're more selective. I guess. And it's also hard to sometimes benchmark private credit funds because they're— you don't really know their benchmarks. But yeah, what did you put for your number 5?

So 4 was hedge funds, 5 was real estate, and then the easiest was, you know, private equity. You know, real estate and private equity are both, you know, there's just, you know, myriad ways To drive alpha, to improve a business. I mean, there's so many different takes, right? Whether that's— I mean, you look at the conglomerate of business expertise, whether that's marketing or accounting or, you know, finance or sales. Like, you know, if you can find a way to drive value in one of those arenas, then, I mean, you can, you know, you're driving alpha. You're winning, right?

Yeah.

You're producing above market returns in that.

And my easiest was real estate for all those same reasons. You can do the same things like that, but on real estate.

Yeah.

You can select the land plots local. You can work with city council. You can get things rezoned. You can be way more creative. And I guess—

Well, you have a lot of influence over the outcome.

Yeah. That's kind of what we're getting at for both of our easiest ones was influence just of your team.

Yeah. It's kind of that we have this chart that we talk about a lot and when we're helping people build funds, you know, risk, Control return, and it's kind of that control element. You know, it's typically higher in real estate and private equity.

So you can way more leverage to control.

Yeah.

First, that's why I didn't like a hedge fund. There's sometimes there's just things out of your control. Oh yeah. That just blow up your whole model.

Yep. Yep. No, that's a good point. That's a good point. You know, and I guess that was the question I was asking myself is, you know, how do I beat the next? Like, can I beat the next guy in this industry? And that's how I chose my ranking. So I think that's maybe we're a little bit off on our.

Yeah, at least I think still a good discussion here.

Yeah. No.

Yeah, for sure. Also, Fun Launch, by the way, we help people launch investment funds. So go to funlaunch.com. You can see what we do. We try to help. We've helped now hundreds of people launch their funds. Lincoln runs a GP stakes fund, is invested in 10 managers so far. I run a fund as well. 11 managers now. We just signed another one. Yeah. So go check us out and comment down below your list. Where would you rank things? Where were we wrong? Where were we correct? Let us know if there's a different list we should rank in the future, and we'll see you in the next episode. Bye bye.